Unsustainable: The Bell Tolls For Subsidies in Saudi Arabia

The Herbert Stein Law runs: “If something cannot go on forever, it will stop.” The tautology is starting to surface in Saudi Arabia, where the government is beginning to recognize that subsidies provided to Saudi citizens are becoming unsustainable and are actually damaging the Saudi economy. As a result, the government is starting to look at reeling them back, if not simply ending them.

Many things in Saudi Arabia are currently receiving subsidies, from gasoline to electricity to water to foods. At present, all Saudis benefit from these subsidies. Now, though, the question is being asked about whether the subsidies might not be limited to only those who truly need them.

It’s a bold question to ask and a good one. Things that are perceived as ‘cheap’ or ‘free’ simply aren’t valued, no matter how expensive they may actually be. As a result, there’s little incentive to not waste them. As a further result, much of the expensive goods and services actually end up being wasted. Were they priced at market value, people would be a bit more careful about how they used and abused them.

Dropping or even limiting subsidies in Saudi Arabia is going to be difficult to do, though. Subsidies are viewed by many Saudis as ‘their share’ of the country’s oil wealth; they believe it is their entitlement. Further, once something has been given, it’s always difficult, politically and otherwise, to take it away. Even by allowing subsidies to continue for those most in need, there will be problems once lines start being drawn. Any line-drawing is going to be seen as arbitrary to some extent. Those who find themselves on the wrong side of the line — say, a minimum income level — are going to feel cheated and are going to be angry.

The alternative, though, is hardly more appealing. It will mean, for example, that eventually all Saudi oil production will have to be used to meet domestic energy demands, including that for the desalination of water. If Saudi Arabia ends up ‘eating’ its principle source of income, there’s no oil left to be sold on international markets. That means no income. And no income means all subsidies will come to a grinding halt.

Subsidies are a problem created by government and can only be solved by government. The solution is not going to be popular.

Saudi Gazette reports on a discussion being led by the Ministry of Economy & Planning:

RIYADH – Minister of Economy and Planning Dr. Muhammad Al-Jasser on Tuesday hinted at cutting subsidies as a measure to ease burden on the economy.

“The subsidies have become exorbitantly expensive and causing enormous damage to the economic system. Therefore, the Kingdom is seeking to address this problem in a careful and balanced way with extra keenness and caution,” he said in a speech at the two-day Euromoney Saudi Arabia Conference here.

Dr. Jasser emphasized the government’s initiative to develop the public transport system as one of the ways to address this problem.

The minister spoke about the main four challenges facing the Kingdom at present with regard to increasing productivity.

“They are multiplicity of sections that made up of the labor market, diversity of economic base, entry of global medium scale companies especially from the advanced countries, and rationalization of subsidies, especially fuel subsidies to those who are not eligible for them,” he said while identifying that the fourth challenge attains greater significance.

Echoing Al-Jasser’s views, Chief Executive of Saudi Electricity Co. Ali Al-Barrak said that Saudi Arabia’s system of electricity subsidies should be revised. “Subsidies are becoming a big part of the government budget,” Al-Barrak said at the conference.

“Subsidies should be revised and done in a different way. They should be smarter and support the low-income people.”

He also described subsidy reform as one tool to reduce energy consumption. Fuel and water subsidies are also issues for the government, he added.

Crossroads Arabia is written by a former US foreign service officer who has had two tours in Saudi Arabia, 1981-83, 2001-03, who reads and speaks Arabic and has spent the bulk of his career in the Middle East, with assignments in Tunisia, Egypt, Syria and Bahrain in addition to those in the KSA.